Analysis of Volatility and Correlation for CME Steel Products

Pouliasis, P. K., Nomikos, N. & Papapostolou, N. C. (2011). Analysis of Volatility and Correlation for CME Steel Products. London: Cass Business School, City University London.

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Abstract

Correlation and volatility between commodity prices is a very important factor to consider when designing risk management and investment strategies. The efficiency of hedging strategies for instance, depends on the existence of strong and stable correlation between spot and futures commodity prices; the absence of correlation on the other hand, or even sudden changes in the level of correlations may have detrimental implications not only for hedging and risk management but also in shaping the efficiency of a country’s energy, manufacturing and food policies. In general,co-movements between commodity markets may be attributed to common macroeconomic shocks on world markets, and the complementarity or substitutability in the production or consumption of related commodities. It is also an established fact that although the prices for related commodities are correlated, correlation changes over time and, in particular, correlation changes have become more erratic over the last five years. Recent research by Buyuksahin et. al (2010) and Silvennoinen and Thorp (2010) has found that returns correlation between commodities has increased substantially during the recent financial crisis. Tang and Xiong (2011) also highlight that the increase in the correlations between the returns of different commodity futures started long before the crisis and cannot be simply attributed to the onset of the crisis. In this report we attempt to identify whether the co-movement of HRC CRU, which is the underlying asset for the CME contract, and a basket of related steel commodities is strong enough.

Item Type: Monograph (Technical Report)
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/16852

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